Rating system for developers

04/12/2006 The Star

THIS is the final article in a series of six fortnightly articles by the Real Estate and Housing Developers Association (Rehda).

THERE have been calls by some quarters for the housing industry to subject its members, namely developers, to a rating system.

These calls might have been motivated by concerns over the growing frustration and disenchantment of some house buyers who have had bad experiences with developers, whether in the form of abandoned housing projects, or delayed delivery of houses, or the poor quality of the final delivered product.

Current law requires a housing developer to be licensed with the Housing and Local Government Ministry before he can develop and sell houses to the public within the present system of selling off plans.

The pre-requisites to obtaining a developer’s licence include a paid-up capital of at least RM250,000 and a minimum deposit of RM200,000 for each licence, among other things.


It is unclear how a rating system that assesses potential for abandonment will help house buyers.
At the same time, the law states very clearly that applicants for the developer’s licence who are bankrupts, or who have been convicted of fraud or dishonesty, or who had been directly involved in the business of a licensed housing developer which has been wound up by a court, will not be granted a developer’s licence.

Whilst there is consensus on the need to educate house buyers on the key aspects of purchasing a house in order to avoid making a bad investment, the proposal to rate developers is very much in an embryonic stage of discussion.

Generally, rating is good for investment instruments, such as bonds, where risks are evaluated before investment decisions, which commensurate with returns are made.

Investors can choose to buy triple A, triple B or even junk bonds, and they do so with full cognisance that they may win or lose in the investment. But they can cut their losses, close the books, and walk away from the investment, in the worst case scenario.

But how does rating developers help house buyers in their purchasing decisions? If developers were to be rated in the same manner as bonds, would house buyers even look at the triple C developers? Would this not spell the death knell for those developers rated triple C, even before their projects are launched?

Perhaps the rating exercise should be confined to rating the product per se, based on several widely accepted key parameters, just like rating of hotels which is based on quality of facilities and service, among other things.

One might even extend the scope to include the quality of materials used, quality of workmanship, management and after sales service. But we must remember one important difference between hotels and housing products.

Hotels, like bonds, allow clients or investors easy and early exit. Most guests or travellers only stay in hotels for brief periods and if they feel the hotel does not live up to their expectations, they can choose not to patronise it again.

But buying a house is a long-term investment for most people, and there is no easy or convenient way to rate developers or housing projects.

Even if we were to accept a rating system for housing based on the parameter of the quality of the finished product, the question arises whether we base this on past performance of the developer or should we just base this on the completed product and rate it then?

Again, it needs to be highlighted that there are many parties involved in the housing delivery process apart from developers, namely, architects, engineers, surveyors, manufacturers of building products, contractors and workers, both skilled and unskilled.

For example, developer A might have engaged very good contractors and subcontractors whose workers are well skilled and trained to work on a project, and the quality of the finished product is highly rated, but the same developer using a different group of people for another project might face serious problems with regard to quality.

Do we only rate the developer, or should the rating system be based on a matrix of rating all the parities involved in the housing value chain?

As for providing buyers with a rating system to assess the risk of project abandonment, how does one come up with such a system?

Looking at the developer’s record, financial capability and governance culture might help buyers establish a better sense of confidence in the developer, but it is unclear how a rating system that assesses potential for abandonment will help house buyers.

Only those that are rated 100% free from abandonment will be acceptable to buyers!

Theoretically, the proposal for a rating system for housing to assist house buyers is a good one. But there remain many unresolved questions that need to be addressed before we adopt this proposal.

Meanwhile, house buyers should avail themselves of information that is readily obtainable from databases such as the Rehda Directory which provides key background information on member developers and their project records, and information available at the Housing and Local Government Ministry on developers who are licensed to build and sell houses, as well as those blacklisted for various offences.

Our duty for the moment is to make such information widely accessible and easily available to all house buyers.